Cohen & Company Inc.
Q2 2018 Earnings Call Transcript

Published: 5 Aug 2018

[Operator:]

Good morning, ladies and gentlemen, and welcome to Cohen & Company's second quarter 2018 earnings call. My name is Hillary and I will be your operator for today. Before we begin, Cohen & Company would like to remind everyone that some of the statements the company makes during this call may contain forward-looking statements under applicable securities laws. These statements may involve risk and uncertainties that could cause the company's actual results to differ materially from the results discussed in such forward-looking statements. Forward-looking statements made during this call are made only as of the date of this call and the company undertakes no obligation to update such statements to reflect subsequent events or circumstances. Cohen & Company advises you to read the cautionary note regarding forward-looking statements in its earnings release and in its most recent annual report on Form 10-K filed with the SEC. I would now like to turn the call over to Mr. Lester Brafman, Chief Executive Officer of Cohen & Company.

[Lester Brafman:]

Thank you, Hillary. And thank you everybody for joining us for our second quarter 2018 earnings call. With me on the call is Joe Pooler, our CFO. We're pleased with the results for the second quarter of 2018. Revenue in the second quarter was driven by better performance in our broker-dealer business as well as gains in our Asset Management and Principal Investing segments. We continue to focus on the development of several new revenue sources across our Asset Management and Capital Markets platforms that are less dependent on the day-today fluctuations of the financial markets. We recognize there's still work to do and remain focused on enhancing stockholder value. In the second quarter, we continued to pay our quarterly dividend. Now, I will turn the call over to Joe to walk through this quarter's financial highlights in more detail.

[Joseph Pooler:]

Thank you, Lester. Starting with our statement of operations, our operating income was $1.4 million for the quarter compared to operating loss of $360,000 for the prior quarter and operating income of $1.7 million for the prior-year quarter. Our loss before income taxes was $826,000 for the current quarter compared to $2.2 million for the prior quarter and income before income taxes of $615,000 for the prior-year quarter. During the second quarter, our income tax benefit increased to $636,000. We expect to have additional net operating loss carryforwards available to offset a portion of our deferred tax liability in future years. The related reduction of the deferred tax liability is recorded as an income tax benefit. And the net income attributable to Cohen & Company was $80,000 or $0.07 per diluted share for the current quarter compared to net loss of $1.5 million or $1.26 per diluted share for the prior quarter and net income of $426,000 or $0.35 per diluted share for the prior-year quarter. And each period presented fully diluted shares outstanding change depending on whether or not the conversion shares from our 2013 and 2017 convertible notes are deemed dilutive. Net trading revenue came in at $7.2 million in the second quarter, up $995,000 from the first quarter and up $1.1 million from second quarter of 2017. Our Asset Management revenue totaled $3.2 million in the quarter, up $1.4 million from the prior quarter and up $1.5 million from the year-ago quarter. In the current quarter, there were one-time performance fees related to our European separate accounts. Also, the successful auction and liquidation of the Dekania Europe I CDO included auction fees and previously unpaid subordinated management fees. There will be no more revenue from the management of the Dekania Europe I CDO. New issue and advisory revenue was $177,000 in the second quarter of 2018, which was down compared to both the prior and year-ago quarters. Second quarter of 2018, principal transactions revenue was $1.4 million, up from both the prior and year-ago quarters, primarily due to favorable marks on some of the assets included in the Euro Dekania capital vehicle. Other revenue was $179,000 in the second quarter of 2018 compared to 198,000 in the first quarter of 2018 and $2.7 million in the second quarter of 2017. The higher revenue in the year-ago quarter was primarily due to greater revenue share payments related to our past sale of the Star Asia Group. Those payments fluctuate due to the amount of incentive fees the Star Asia Group receives during each period. We received our final payment related to this past sale of the Star Asia Group in the second quarter of 2018. Compensation and benefits expense for the second quarter was $6.6 million, up $1.4 million from the prior quarter and $1 million from the prior-year quarter. The quarterly changes were primarily the result of the variable compensation model we have in place and relate to our variations in net trading, new issue and asset management revenues from the comparable periods, as well as headcount changes. Compensation as a percentage of revenue was 54% in the second quarter of 2018 compared to 56% in the first quarter of 2018 and 49% in the second quarter of 2017. The number of Cohen & Company employees was 87 as of June 30 compared to 92 as of March 31 of 2018 and 82 as of the year-ago quarter end. Net interest expense for the second quarter of 2018 was $2.2 million, including $886,000 on our two trust preferred debt instruments, $565,000 on our 8% convertible notes and $679,000 on our redeemable financial instruments. In terms of our balance sheet, as of June 30, our total equity was $44.9 million, a decrease of $3.2 million from the year-end December 31 of 2017. Total assets continue to grow based on the growth in our matched book repo businesses. At the end of the quarter, our mortgage group had, on the balance sheet, approximately $175 million of gestational matched book reverse repo balances and $2.24 billion of GCS matched book reverse repo balances. As of quarter end, consolidated corporate indebtedness was carried at $44.6 million and we had $16.6 million of unrestricted cash on the balance sheet. We've announced a $0.20 dividend for the quarter and we'll continue to review the dividend policy on a quarterly basis. The dividend is payable on August 31 of 2018 to stockholders of record on August 17 of 2018. Finally, we expect to file our 10-Q no later than Friday of this week. With that, I will turn it back over to Lester for closing comments.

[Lester Brafman:]

Thank you, Joe. Please direct any investor questions to Joe Pooler at 215-701-8952. His contact information is at the bottom of our earnings release or via email to [e-mail]. Thank you for joining us today. Operator, you can now end the call. Q -

[Operator:]

This concludes today's conference call. You may now disconnect. Presenters, please hold.